An Energy Savings Performance Contract (ESPC) can be a great way to maximize and leverage American Recovery and Reinvestment Act (ARRA) funds, and can help facilities finance energy conservation measures (ECMs) without any upfront capital costs. ESPCs are a type of financial mechanism that can pay for today’s facility upgrades with tomorrow's energy savings – all without tapping an organization’s capital budget. A contracted partnership between a facility owner and an energy service company (ESCO) is considered a time- and cost-effective method for completing comprehensive energy upgrades.
Question: In the ESPC process, once we have received a cost proposal from the ESCO, what should we then verify?
Answer: A detailed energy survey contains information about the facility’s operations – information that is used to develop a final proposal, including a detailed project scope and construction costs. The final cost proposal should also provide detailed calculations of the energy and energy-related cost savings estimated for the project. Cost proposals will typically include the total cost for installing, implementing, and commissioning each ECM, including breakouts for design, project management, non-staff labor, materials, equipment, measurement and verification of savings, and other direct and indirect costs. The ESCO should identify recurring costs associated with sustaining the project performance, including annual breakouts for measurement and verification, maintenance fees, performance monitoring fees, and ongoing training service fees as applicable.
One item that should be carefully verified are any proposed operational savings, which include savings other than energy, such as labor or material savings that result from the implementation of a particular ECM. It’s very important to avoid overstating these savings in the proposal, as operational savings can usually only be claimed by a verifiable reduction in current operations and maintenance (O&M) contractor costs, or for example, by letting employees go rather than reassigning them. It may be helpful to inform the ESCO up front of any conditions in which the owner would agree to use operational savings to pay for the project, since operational funds can charge to a different budget line item than the utility funds. Another item that should be carefully verified are proposed energy savings. A facility’s baseline energy consumption provides key data that can be used to calculate the energy savings and determine the methodology for measuring and verifying any resulting savings. The International Performance Measurement and Verification Protocol (IPMVP) can help to accurately validate guaranteed energy savings from installed equipment and improvements.
Additional items for verification may include project interest rate, contract term, payment and amortization schedules, equipment costs (e.g., as compared to GSA schedule pricing), the inclusion of utility or renewable energy incentives and rebates, ESCO markup on equipment and services, labor rates for design, engineering, project management and other services, and markup on subcontractor costs.
Ultimately, each line item should be scrutinized and clearly defined for what is included and not included under the line item to avoid potential markups or other incidental errors. When in doubt, always ask for clarification before proceeding. For additional information or assistance with the review of cost proposals, or other ESPC-related questions, please submit a comment to this post or contact the Technical Assistance Team. Project resources are also accessible through the Solution Center.
Content for this Blog post courtesy of Sentech-SRA/ICF International